Yellen's Gaffe

Is Janet Yellen suddenly signaling an imminent rise in U.S. interest rates?

At a conference in Washington Wednesday sponsored by the Institute for New Economic Thinking, in an answer to a question from co-panelist Christine Lagarde, Yellen said:

"I would highlight that equity-market valuations at this point generally are quite high. Now, they're not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there."

The Federal Reserve chair also had something to say about interest rates. "We could see a sharp jump in long-term rates" after the Fed starts to normalize – i.e., raise – interest rates, she said.

Her words had the desired effect, if indeed that was her desire. Stock prices dropped around the globe, as did bond prices, driving yields sharply higher. The yield on the 10-year German government bund jumped as high as 0.78%, its highest level in more than five months and up from just 0.08% only three weeks ago. The yield on the 10-year U.S. Treasury note rose above 2.20%, its highest level in two months and up more than 35 basis points in the past month.

It seems mighty curious that she made those remarks in response to a question by Madame Lagarde. Did the Fed chair ask the managing director of the International Monetary Fund to serve up a softball so she could launch a trial balloon? (Sorry for the mixed metaphors).

As we know from history, the Fed signals its intentions in odd ways. Sometimes it doesn't do a good job of it, sometimes it does so inadvertently, sometimes advertently. I'm wondering if Wednesday's comment by Yellen wasn't the latter.

When you expect the Fed to say something, it doesn't. After last month's Federal Open Market Committee, the subsequent monetary policy announcement was surprisingly noncommittal.

Just hours after the Commerce Department released a disastrous report on first quarter GDP, the Fed's reaction was a ho-hum "economic growth slowed during the winter months," dismissing the 0.2% annualized rise in U.S. economic growth as "in part reflecting transitory factors." It gave no hint on its next rate move.

Yellen noted Wednesday what happened when her predecessor Ben Bernanke suggested in 2013 that the Fed could start tapering its bond purchases. It set off the famous "taper tantrum."

Did she deliberately cause her own "tantrum" on Wednesday? Or was she merely testing the waters, to see what the market reaction would be?

Her comments were hardly insightful or particularly controversial. Everyone with a brain knows the stock and bond markets are inflated. But Fed chairs aren't supposed to come right out and say those things without possibly inciting a full-blown panic.

The journalist and social commentator Michael Kinsley famously defined a gaffe as "when a politician tells the truth — or more precisely, when he or she accidentally reveals something truthful about what is going on in his or her head."

In this case, it's not a bubble unless the Fed says so, even if we all knew it already. And the fallout can be big.

Of course, this could all be part of the Fed's strange, sadistic delight in toying with the financial markets. If investors and traders think you're going to raise rates, do nothing. If the markets then relax and expect no rate hike until late this year or even 2016, turn right around and let them think a rate increase is right around the corner.

Don't be surprised, then, if the Fed decides to begin raising rates in June, just because most people – including me – have largely written that off, based on previous Fed statements and the past several months of feeble economic reports.

Friday's employment report for April, which is expected to show a sharp rebound in job creation following March's dismal report, may provide some clues about the Fed's next move.

But let's face it, Mrs. Yellen: Regardless of when the Fed starts raising rates or how it's communicated, there is going to be a negative reaction in the financial markets. Your comments Wednesday proved that, yet again. So there's no point in delaying the inevitable just because you don't want to upset anyone.

As we found out after the "taper tantrum," the markets will get over it and adjust in short order. There's no point in waiting any longer.

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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6 thoughts on “Yellen's Gaffe”

I'd like to hear the truth from the US FED for once, as opposed to guessing games. They obviously believe they're unaccountable, and when they had the chance to regulate the OTC derivatives they did nothing (on behalf of their future employers and at the expense of mom and pop).

The homeless population jumped through the roof with forced sales and repossessions, I dearly hope mom and pop will finally demand an end to this theft of wealth.

The average length of maturity for federal debt is between 7 and 8 years. They've been doing this QE for six years now. Much of the debt has been acquired by the Fed and most have been refinanced at the low rates. Raising rates won't have much of an effect.

A couple of 25bp hikes aren't going to be world shaking events, they'll just reverse some of the euro and oil's recent gains while tempering speculative belief that this bubble will never deflate. I consider Janet Yellen's comment as a low key version of Alan Greenspan's "irrational exuberance" but don't expect her to raise the rate to 6.5%. More likely 0.5%, then Sept. 0.75% while dangling the threat of higher rates. That won't hurt consumers, the resulting cheaper commodities will help consumers, and the resulting cheaper oil will keep the pressure on America's enemies in Russia, Iran, and Texas.

Go ahead and raise the rates and watch the Government Debt soar. First stop, $30 trillion. This will be good for precious metals especially when people realize the "tallystick" (paper money) is worthless. What the market giveth the FED taketh away along with the value of the dollar and it's status is coming to an end.

I went back 10 years in Google and checked the FED announcements about raising rates. They are the exact copy of the announcements now. Nothing changed. It is a game for the writers and the public. Just market talk (lies). When we must borrow money to pay the interest on the existing loans we can not talk about raising rates. Nick

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